By Laura Mandaro
The sudden contraction in U.S. consumer spending and global liquidity that brought some of America's most revered companies to their knees has made the Dow Jones Industrial Average -- meant to represent the country's leading companies -- more a benchmark of laggards.
For the year to date, the gauge of 30 large and established companies (DJI) has fallen 5.7%. The S&P 500 (SPX), made up of a wider variety of large-capitalization and some younger companies, has lost less than 1%.
The Wilshire 5000 Total Market index has gained 1.3%. And the more growth- and tech-oriented Nasdaq Composite (RIXF) index has rallied 14%.
Steep slides in shares of General Motors Corp. (US-GM) and Citigroup Inc. (C), which hit record lows this year, weighed on the Dow's performance. These stocks were dropped from the blue-chip barometer earlier this month.
But even with new entrants Travelers Cos. (TRV) and Cisco Systems (CSCO), the Dow may fail to catch up as a recovering economy favors smaller companies that that don't sell much of their wares overseas.
"We think the recession is ending right here and the resumption of growth will disproportionately benefit smaller-capitalization companies," said Phil Orlando, chief equity strategist at Federated Investors, which manages about $409 billion.
** On Thursday, all U.S. benchmarks fell after the Labor Department's June jobs report showed a steeper drop in payrolls than economists were expecting. The surprise decline, a loss of 467,000 jobs compared to 325,000 anticipated, added to concerns that stocks' rise since early March had got ahead of itself.
"Concerns about continuing weakness in the economy have certainly put a damper on equity markets today," said Bill Stone, chief investment strategist at PNC Wealth Management. Listen to full interview.
Bad start to weekend
U.S. stock losses steepened after the New York Stock Exchange extended the trading session by 15 minutes due to unspecified system irregularities.
The Dow average closed down 223 points, or 2.6%, at 8,281. The S&P 500 sank 27 points, or 2.9%, to 896 points. The Nasdaq Composite fell 49 points, or 2.7%, to 1,797.
The Dow industrials and the S&P 500 registered their third straight weekly loss, the longest weekly losing streak since early March, when stocks began their roughly four-month climb. For the week, the Dow closed off 1.9%, the S&P 500 sank 2.5%, and the Nasdaq fell 2.3%. Markets are closed Friday for the Independence Day holiday.
Bitten by banks
The performance of the Dow-30 over the two years has shown that a traditional strategy of favoring large-cap companies over smaller ones during tough times didn't pan out.
"Going large didn't work this time. Staying small helped," said James Paulsen, chief investment strategist at Wells Capital Management, which manages about $375 billion.
In particular, tech, retail and emerging-markets sectors all outperformed the S&P 500 since the summer of 2007, when the financial crisis got into gear, he noted.
Since the bear market started in October 2007, the Dow has fallen at about the same pace as the S&P 500 and the Wilshire 5000, registering a 42% drop.
For just this year, however, the other indexes have left the Dow in the dust. One factor dogging the blue-chip gauge: Several constituents were the big banks and financials at the epicenter of the mortgage and credit crisis.
Shares of Bank of America Corp. (BAC), a Dow-30 component, plunged to below $3 back in late February. The stock is down 10% this year.
Citigroup's stock tumbled to an all-time low under $1 in March as worries that huge losses would lead to a government takeover. The publishers of the Dow Jones Industrial Average removed Citi from about a month ago, at the same time when GM, another erstwhile component, filed for bankruptcy.
Even General Electric Co. (GE), the worse performer among the Dow's current consistuents with a 29% year-to-date loss, owes much of its woes to its finance arm.
Big percent rebounds in financial stocks since early March have had limited benefit to the Dow average because, unlike other indexes, it's price-weighted rather than market-cap weighted. That means stocks trading at a higher price can have an outsized impact on the average.
Bank of America shares, for instance, have quadrupled since early March. But since they are worth only about $12.60 a piece, they have less of an impact than changes in higher-priced stocks, such as IBM (IBM), at $103 a share, or Exxon Mobil Corp. (XOM), at $69 a share.
In fact, financial stocks have a bigger influence on the S&P 500, where the sector comprises about 14% of the total index.
For the Dow Jones Industrial Average, in contrast, financials make up about 10%, both on a price- and market-cap weighted basis.
Buck to give a boost
Since hitting a closing low on March 9, the Dow has rallied 26% -- slightly under the 33% gain in the S&P 500 and the 34% gain in the Wilshire 5000.
It's likely to continue to underperform as a recovery favors tinier, more nimble companies, analysts say. Fluctuations in the U.S. dollar are one reason.
Federated's Orlando anticipates that the dollar has ended its slide and will strengthen against the euro. A stronger dollar puts more domestic-oriented companies at the advantage to larger multinationals -- the type of companies like McDonald's Corp. (MCD) and General Electric that make up the Dow.
Unless they're struggling against huge job losses, plunging industrial output and a historic credit squeeze, multinationals tend to benefit when the dollar slips.
"If we're right that the dollar will strengthen over the next year, that's not great for large-capitalization companies," Orlando said.